Iran Cancels Loan for Pakistan Gas Pipeline, Which U.S. Opposes

December 16, 2013 - 5:26 AM

Pakistan-Iran pipeline

Iranian welders work on a pipeline near the Pakistani border in March 2013. The IP project aims to transfer natural gas from Iran to Pakistan, and is meant to be operational by the end of 2014. (AP Photo/Vahid Salemi, File)

( – Just days after Pakistan said it had agreed with Iran to speed up work on a gas pipeline being built between the two countries – a project strongly opposed by the U.S. – Iran has abruptly canceled a $500 million loan to Islamabad for work on its side of the border.

Iran’s deputy oil minister, Ali Majedi, attributed the decision to the impact of sanctions on Iran’s economy, and slow progress on the Pakistani part of the project known as the IP (Iran-Pakistan) pipeline.

“Pakistani officials were told in recent talks that, given the sanctions, Iran is not able to finance construction of the [Pakistani section of the] pipeline and has no obligation to do so,” he said.

Majedi said Iran was advising Pakistan to look to European companies instead for the financing it needs to carry out its side of the deal – an estimated $1.5 billion.

Iran has already built a 600-mile-long stretch of pipeline, running from its giant South Pars gas field to near the border at a reported cost of $2 billion. However, it says “procrastination” on the Pakistan side of the IP project has put the completion date years behind schedule.

Originally, the plan was for energy-hungry Pakistan to import 21.5 million cubic meters of Iranian gas a day by the end of 2014, but Majedi said that even if work began immediately on the Pakistani section it would take four years to complete.

He warned that if Pakistan fails to import gas through the pipeline by the end of next year as set down in a contract, Iran will demand compensation in the form of cash fines. Iran’s Press TV reports that penalties could amount to $1 million a day.

Iran-Pakistan talks on the pipeline began years ago during the tenure of former Iranian President Mahmoud Ahmadinejad, and the project looked well on track early this year, when Pakistani federal cabinet gave final approval and the deal was inked.

During a visit to Tehran in March, then-Pakistani President Ali Asif Zardari shrugged off Western concerns about the pipeline undermining sanctions, saying efforts by “enemies of Islam” to prevent closer ties between Iran and Pakistan were failing.

Pakistan has received more than $20 billion in U.S. military and non-military aid since 2001.

Zardari appeared not to take the U.S. view on the IP project seriously, even though the State Department warned then that it was in Pakistan’s “best interest to avoid any sanctionable activity.”

(Sanctions against parties investing in Iran’s energy sector apply under the 1996 Iran Sanctions Act, expanded in the 2010 Comprehensive Iran Sanctions, Accountability, and Divestment Act. The 2012 Iran Threat Reduction Act added penalties for those helping Iran’s gas, oil, financial and shipping sectors.)

Both Pakistan and Iran have since changed governments (although real power in Iran continues to reside in supreme leader Ayatollah Ali Khamenei).

After new Pakistani Prime Minister Nawaz Sharif visited Washington in October, Pakistani media reported that he had asked the U.S. to exempt the IP pipeline from sanctions, without success. Officials in Islamabad said Pakistan was now caught between its contractual obligations to Iran and an inability to raise funding for the project because of the sanctions threat.

If Pakistan was hoping a recent diplomatic breakthrough on Iran’s nuclear program might ease the pressure, it was quickly disappointed when the U.S. made clear the interim agreement had no impact on its opposition to the Iran-Pakistan pipeline project.

“Our position on that has not changed,” State Department spokeswoman Jen Psaki told a briefing on November 26, three days after the nuclear deal – entailing limited curbs on Iran’s nuclear activities in exchange for limited sanctions relief – was reached in Geneva.

As recently as last week Pakistan’s Foreign Office reiterated its commitment to the pipeline, but difficulties in raising funds could put the entire project in jeopardy.

Asked about the project holdup on the Pakistan side of the border Imtiaz Gul, executive director of the independent Centre for Research and Security Studies in Islamabad, said Monday, “Much of the delay in this project can be easily attributed either to the U.S. pressure or the presence of pro-U.S. lobbies within the Pakistani governance structures.”

Gul said finding additional sources of energy is vital for Pakistan. He noted that the government was pursuing alternatives, including coal-based initiatives and an offer by Qatar to supply liquefied natural gas.

“That should make up for the absence of Iranian gas, which the Iranians are selling at expensive rates any way,” he said.

The U.S. says it recognizes Pakistan’s significant energy needs but has been encouraging alternatives to the Iran pipeline.

These include a longstanding proposal to pipe natural gas from the Caspian Sea through Afghanistan to Pakistan and then on to India (the Turkmenistan-Afghanistan-Pakistan-India or TAPI pipeline); and the Central Asia South Asia Electricity Trade and Transmission Project (CASA-1000), which would allow Pakistan and Afghanistan to buy electricity from Tajikistan and Kyrgyzstan. The U.S. last week pledged $15 million in financing towards CASA-1000.